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Mythologies of debt relief

Four \myths\ of debt relief were outlined in an article written in The Guardian in November, 1998, by Jack Boorman, Director of the IMFï¿½s Policy Development and Review Department.

The following information dispels these arguments maintained by the IMF surrounding debt relief.

As the IMF delays and minimizes debt relief available through the HIPC Initiative, it is using the program to increase its control of national economic policies and creating myths to justify its actionsï¿½

Myth #1. \Poverty is not due to debt.\

The Reality: The debt problem is the biggest obstacle to overcoming poverty alleviation.

While the causes of poverty are many and complex, the debt problem stands as the single biggest obstacle to alleviating it. The facts speak for themselves: for every $1 received in aid grants in 1998, sub-Sahara Africa paid $1.41 in debt service.

The IMF had admitted responsibility for poverty caused by debt, arguing that \the prime cause of poverty is inappropriate economic policies, poor lending decisions by creditors and social and political disruptions\. However, its response has been to call for \improved\ policies at the national level, while taking no concrete responsibility as a creditor for these bad loans.

The World Bank and the IMF at Fault

In the 1970s, the World Bank and the IMF loaned money freely and inappropriately because of a lending mania that resulted from an abundance of Eurocurrency money. Because of this and U.S. inflationary monetary policies that caused high interest rates and falling commodity prices, World Bank lending to developing countries increased five-fold, while it actively encouraged banks and Northern governments to increase their lending too. Often these loans were made to illegitimate regimes, for corrupt purposes or for badly managed and inappropriate projects.

The poor are now being forced to pay for this irresponsible lending and borrowing (which they did not agree to and which rarely benefited them) through cutbacks in education and health spending, and reductions in their living standards and physical well-being.

Inappropriate lending

In 1988, Brazil's debt had reached $121 billion. Hereï¿½s where the money went:

a)$16.6 billion had been loans to transnational corporations, guaranteed by the state, for large-scale industrial and infrastructural \development projects\, many still incomplete;

b) $18 to $20 billion never entered the country, but was deposited in Swiss bank accounts by a local, wealthy elite concerned about the economic and political stability of the country;

c) $41 billion was required for increased import costs due to the devaluation of the Brazilian currency (imposed by the IMF as a condition for further bank loans);

d) $34 billion resulted from dramatic increases in interest rates by the central banks of the industrialized countries.

Myth # 2. \Debt payments do not mean insufficient social spending.\

The Reality: Africa spends twice as much on debt service as on basic health care.

In 1994 Zambia spent thirty times more in debt repayments than it did on education. The World Bank's own poverty studies admit that \serious drops in attendance rates have been observed, disproportionately affecting girls.\ Between 1989-1993 Zambia made a net transfer to the IMF of $180 million.

In Nicaragua debt repayments account for more than a third of government spending, double the amount spent for education and clean water provision.

Contrary to the prevailing belief that Africa does not service its debts, sub-Saharan Africa paid a total of $101 billion in debt servicing from 1982-1992. The total for all of Africa was $240 billion. Debt servicing diverts resources from local needs on a huge scale, depriving Africans of their right to adequate nutrition, health and education.

The World Bank now accounts for over $36 billion of sub-Saharan Africa's overall debt, or close to 20 per cent.

Less than one-third of Africa's debt service bill would fund the additional costs of programs required to meet the key social-sector goals set by the World Summit for Children in 1990.

Myth # 3. Writing off debts would cause more problems than it would solve.

The Reality: This peculiar argument is based on the supposition that \unconditional cancellation risks debt relief being squandered\, which would in turn mean a drop in aid flows. This belief is based on two main assumptions. (1)that taking money out of the country in debt payments is preferable to putting it in the hands of the national government; and (2) that the IMF regards itself as the exclusive authority for permitting or refusing debt relief, and overseeing where any freed up money will be spent.

Because of these assumptions, the IMF has refused to write off any debts whatsoeverï¿½ And the problem has grown steadily more serious and harmful over the years:

Between 1980 and 1987 the net transfer of resources from less developed countries to their creditors amounted to US$ 287 billion.

Although Latin America and the Caribbean paid US $150 billion more in debt service than they received in new credits between 1982 and 1987, their total debts still grew from US$ 330 billion to $410 billion.

The disdainful position taken by the IMF provides a challenge to assumptions of representative governance and the sovereignty of states. It betrays our belief in the strengths and values to be found in democratic systems, by placing itself - an unelected, technocratic bureaucracy - in a position of authority over national governments. Wealthy nations would erupt with outrage if the IMF did the same to them.

Myth #4. The HIPC Initiative provides speedy debt relief.

The Reality: The HIPC Initiative was launched in the fall of 1996. So far, only 7 have qualified for debt relief packages, from the 12 (out of 41 HIPCs) countries that have been reviewed. These countries must complete several years of economic reform, directed by the IMF, before they reach the completion point of the HIPC Initiative program. Only 2 countries have done so thus far.

When the program began, 25 countries might have expected a decision point by end-2000, with about 15 countries qualifying. For these, the completion point would follow 3 years later. Of the 25, one-third have already had their decision points pushed back in time, because of \slippage\ in their economic restructuring programs or, in a few cases, armed conflicts.

World Bank and IMF staff argue that writing off debt rapidly and generally, as of the year 2000, for example, would see \good intentions frustrated by continued inefficiency in using the savings from debt relief properly\. In other words, if debt relief were too swift, the IMF would lose a means of controlling the national economies of low-income countries. As one IMF representative said, \once you cancel debt, you no longer have any leverage left\.

Promulgating debt relief as a reward to be conferred, rather than an economic and social necessity, is a transparent effort by the IMF and World Bank to twist a hurtful situation to their own purposes.

Indeed, the extent to which the HIPC Initiative will provide freed-up resources is doubtful. Of the 7 countries in the program, none can expect their debt service to go down, while 6 of them will continue to see their debt payments climb. As the April 1999 staff review of the HIPC Initiative admitted, \the Initiative may not be significantly reducing debt service from current levels paid\.

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Sources available from the Social Justice Committee of Montrï¿½al